J&J's spending spree continues

Johnson & Johnson buys $1 billion stake in Elan to acquire Alzheimer's program

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NEW BRUNSWICK, N.J.—On July 2, Johnson & Johnson announced its second billion-dollar purchase in as many months: The acquisition of Dublin, Ireland-based neuroscience biotechnology firm Elan Corp. PLC's Alzheimer's disease program for $1 billion follows J&J's May announcement that it will acquire Cougar Biotechnology for the same price tag. The deal gives J&J access to a market where it had almost no presence and gives Elan a much-needed cash infusion and Alzheimer's program investment.

Under the agreement, J&J will invest $1 billion in new Elan equity in exchange for an 18.4 percent stake. J&J will also acquire all of the assets and rights of Elan's Alzheimer's Immunotherapy Program (AIP Program) through a newly formed company. The AIP program is a 50/50 joint venture with Wyeth to research, develop and commercialize selective products for the treatment and/or prevention of neurodegenerative conditions, including Alzheimer's disease.

Elan will receive a 49.9 percent equity interest in the new company and is entitled to the same percentage share of profits and certain royalty payments upon the commercialization of products under the collaboration with Wyeth. J&J, through its affiliate, will assume and continue Elan's activities with Wyeth under the AIP program and initially commit up to $500 million to continue the development and launch activities of bapineuzumab, a potential first-in-class treatment that is being evaluated for slowing the progression of Alzheimer's disease, as well as other compounds. The agreement provides for additional funding obligations of the parties if needed.

The AIP program includes multiple compounds being evaluated for slowing the progression of Alzheimer's disease. The lead compound, bapineuzumab, administered intravenously once every three months, is currently in Phase III clinical trials. A subcutaneous formulation, administered once a week, is currently in Phase II trials. In addition, a vaccine for Alzheimer's disease (ACC-001) is also under development.
The transaction is expected to close in the second half of 2009, pending regulatory approvals. Both companies' boards of directors have approved the deal.

For J&J, the deal is inherently risky, but also potentially very lucrative, with no available treatments to stop or reverse brain damage caused by Alzheimer's disease currently on the market—one estimated to have roughly 5.3 million patients in the United States and more than 100 million worldwide expected eventually as the population ages.

"This transaction will be a key component in achieving our vision to develop treatments that target underlying disease biology, thereby helping to prevent some of society's most devastating illnesses," said Dr. Husseini Manji, global therapeutic head of neuroscience at J&J's R&D division, in a statement. "We expect to focus our resources on bringing the AIP Program to fruition as quickly as possible because of its potential to slow the progression of Alzheimer's disease."

According to Bob Purcell, director of corporate relations for Elan, the deal was part of a strategic review the company launched in January to seek partners and minority investors to help it reduce debt, cut costs and increase profits. The J&J deal will help Elan reduce its net debt by 70 percent to $400 million, help cut costs by $100 million annually, and enable it to make a pre-tax profit by the end of next year, Purcell says.

"We talked to about 30 companies, most of which were major players in pharma," he says. "Many companies were interested in us because of our pipeline. Specifically, we were looking for a partner with financial resources, scientific or development expertise, and a commercial reach in the global marketplace. J&J ticked off all those boxes. The agreement with J&J provides Elan with significant financial flexibility and the resources to further invest in and accelerate the development of our pipeline. We are confident this will enable Elan to move into an exciting new phase focused on defining the future of degenerative neurological therapies."

The AIP program was attractive to J&J because of its advanced development stage, Purcell adds. In particular, bapineuzumab—one of five Alzheimer's disease candidates Elan is pursuing—was an attractive program to J&J because of its unique approach to treating Alzheimer's disease, he says.

"The thing that is interesting about this drug is that it has the potential to be a disease-modifying product," Purcell says. "While other approaches treat Alzheimer's disease symptomatically, this is the first product that will actually modify the course of the disease. It is an orally administered, passive therapy infusion that puts antibodies into a patient's system. It interferes with beta-amyloid forming plaques that are believed to underlie Alzheimer's disease neuropathology, and prevents it from creating a tangle. This is a really exciting opportunity for Elan, and J&J is a strong partner who will has the resources to help move bapineuzumab forward."

Although the two companies' stocks responded differently to the announcement—Elan's have spiked, while J&J's have slumped—analysts called the deal a win-win for both companies.

"It's good news for Alzheimer's patients and their families," said Erik Gordon, an analyst and professor at the University of Michigan's Ross School of Business. "For J&J, it looks like a high-risk but reasonable bet."
Citing generic competition, sluggish pipelines, pending healthcare reform proposals and the economic recession, analyst Steve Brozak of WBB Securities agreed: "J&J needed to do this," he said.

Some investors may still be nervous given Elan's partnership with Biogen to market Tysabri, a multiple sclerosis drug that was pulled from the market in 2005 and relaunched a year later. Just last week, the drug was linked to a tenth case of the rare brain infection progressive multifocal leukoencephalopathy, or PML.

However, the bad news about Tysabri appears to be baked into the stock, as it is a well-known risk, said Barron's writer Teresa Rivas.

"For Elan, it goes without saying that partnering with the most respected company in the world is a boon, especially one with the financial heft to endure a deep recession," Rivas wrote. "And with a near-even split of the profits, it stands to reap many of the same benefits as J&J if its Alzheimer's drugs can deliver. Ultimately, J&J and Elan have struck a deal that's beneficial to both, and may launch the companies to the forefront of a market that is growing around the world. For uncertain times, these shares may well be a remedy." 

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